Every small business has a smattering of expenses to account for and budget for. Rent, utility bills, and office supplies are common and, when totalled together, aren’t insignificant.
For example, in 2019, real estate agents spent 1.3 per cent of their total revenue on rent and another 1.3 per cent on utility bills. These percentages may appear small, but when every dollar counts, it’s important to keep as much of your revenue as possible. As you scale, those small percentages come to represent not-so-small dollar amounts.
Fortunately, many small business expenses may be claimed and written off as tax deductions. The Canada Revenue Agency (CRA) allows businesses to deduct business expenses when they incur to earn income.
But before you reduce your tax obligation, it’s important to understand what qualifies as a deductible business expense and how to record and claim business expenses in Canada.
How to determine if a business expense is tax deductible
In Canada, business expenses are only tax deductible when the expense is reasonable for your line of work. Reasonable business expenses vary from business to business, as what’s reasonable in one industry differs from that of another.
Generally, business expenses are deemed reasonable if they’re appropriate to your business in both type and cost. For example, you may deduct the cost of your telephone, like your Telus bill, if the expense was incurred for business purposes.
In contrast, the owner of an antique store likely could not write off the purchase of a brand-new motorcycle.
Determining if an expense is reasonable is relatively straightforward. If it’s an expense intended entirely for business purposes, such as the office electricity bill, it would be deemed a business expense. However, what happens if you use a single cell phone for both business and personal use?
In a case like this, you could only claim a fraction of the expense—the portion of expenses incurred for business purposes. If you use your phone for business 20 per cent of the time, 20 per cent of your phone bill would be tax deductible. The same applies to the purchase of the hardware. When possible, it’s advisable you put your utility accounts in the company’s name, rather than your own. Check with your accounting professional before making these kinds of capital expenditures.
Keeping track of your business expenses
The CRA expects entrepreneurs and small businesses to document and track business expenses. Any business expense that you intend to claim as a tax deduction must be supported by documentation, including:
- Sales invoices
- Purchase and sales agreements
- Cancelled cheques
There are two exceptions to the documentation rule: meal and vehicle expenses. For these expenses, you can use a simplified method.
Meal expenses are tax deductible based on a flat rate up to a maximum daily allowance. If you opt to deduct the actual cost of the meal (the detailed method), you’re required to treat it like any other business expense, including recording the transaction and keeping relevant documentation.
Similarly, you may use either a simplified or detailed method to claim vehicle expenses as tax deductible. The simplified method uses a flat cents-per-kilometre rate to reduce your tax obligation, though you will need to keep a log of work-related mileage.
It’s a good idea to use accounting or bookkeeping software to record your business transactions and expenses. Many apps include tools to store, sort, and organize your receipts, invoices, and other documentation.
If you’re not the DIY sort, consider hiring a bookkeeper to maintain your books and ensure you’re accurately tracking expenses. Professional bookkeepers specialize in managing business transactions and help ensure your small business is financially healthy—and not drawing the ire of the CRA.
What is a tax deductible business expense?
Qualifying business expenses that may be claimed as tax deductions include, but not limited to:
Advertising (in Canadian newspapers, on Canadian television, and/or on Canadian radio)
- The entire expense is deductible if your advertising is directed to a Canadian market and the original editorial content is 80 per cent or more of a periodical’s non-advertising content
- Deduction is capped at 50 per cent if your advertising is directed to a Canadian market and the original editorial content is less than 80 per cent of a periodical’s total non-advertising content
- You cannot collect money owed to you in the current year and have already included the receivable in income
Business Start-up Costs
- Must have started your business in the fiscal period in which the expense is incurred
- Must have a clear launch date for the business
Business Tax, Fees, Licenses, and Dues
- Annual license fees are tax deductible
- Annual dues or fees for belonging to professional organizations may be deducted, unless the organization’s main purpose is dining, recreation, or sporting
- The cost of subscriptions to professional publications may be deducted
- Some business taxes are deductible
- business-related purposes may be deducted if workspace in your home is your primary place of business, or such space is only used for business-related purposes and to meet with clients, customers, or patients
- The total deduction must be proportionate to the amount of space dedicated to your business (e.g. 25 sq. m. office in a 250 sq. m. home = 10 per cent max deduction of qualifying expenses)
Capital Cost Allowance
- A portion of the cost of depreciable property, such as buildings, furniture, or equipment, may be deducted over time
Delivery, Freight, and Express
Fuel (except for vehicles)
- Fuel related to business use in your home must be claimed as a business-use-of-home expense
- Commercial insurance premiums are deductible
- Vehicle-related premiums must be claimed as motor vehicle expenses
- Premiums related to business use in your home must be claimed as business-use-of-home expenses
- A portion of life insurance premiums may only be claimed if the policy was used as collateral for a business-related loan
Interest and Bank Fees
- Interest incurred on borrowed money is deductible if the loan was acquired for business purposes
- Certain loans have limitations
Legal, Accounting, and Professional Fees
- Fees incurred for professional advice, services, or consulting are deductible
- Income tax and GST/HST preparation and filing fees are deductible
- Fees incurred to buy capital property are not deductible
Maintenance and Repairs
- The cost of labour and materials for repairs done to property used for purposes of business income is deductible
- The value of your own labour, cost for repairs of a capital nature, or costs reimbursed by an insurance company are not deductible
- Repairs related to business use of your home must be claimed as a business-use-of-home expense
Meals and Entertainment
- Fifty per cent of the lesser of either the amount incurred or a reasonable amount may be deducted
- Special rules may apply when traveling
- Small items, such as pens, pencils, and paperclips, may be deducted
- Calculators, furniture, and items deemed capital items may not be deducted
- May be deducted in the year or years in which you receive the benefit if you are using the accrual method of accounting
- Non-inventory related prepaid expenses may not be deducted if: you are using the cash method of accounting OR it has been two or more years since paying the expense
- May be deducted for property-related to your business
- Property taxes related to business use of your home must be claimed as a business-use-of-home expense
- May be deducted for rents incurred for business use
- Rent related to business use of your home must be claimed as a business-use-of-home expense
Salaries, Wages, and Benefits
- Gross salaries and other benefits paid to employees may be deducted, except for salaries or drawings paid to any owners or partners
- The cost of items used indirectly to provide goods or services may be deducted
Telephone and Utilities
- Phone and utility costs incurred to earn income are deductible
- Utility expenses incurred at your home for business-related purposes must be claimed as business-use-of-home expenses
- Cell phone bills, such as your Telus bill, can also be tracked through your business-use-of home expenses when you are paying for the bill personally
- The cost of travel expenses incurred for the sake of business or professional-related purposes may be deducted
Before you can claim an expense as a deduction, your business must have a reasonable expectation of profit. In other words, you may not be able to claim an expense as a deduction if the CRA has reason to suspect your activities may never be profitable.
For example, income earned from a hobby means you might not be eligible to claim expenses as tax deductions since you never intend it to be profitable. However, you should speak to an accountant to see if it would be wise to have your hobby classified as a business, and therefore eligible to claim tax deductions.
Businesses that aren’t yet turning a profit may have to show the CRA when they expect to be profitable. In this case, you may be able to successfully claim a deduction even if your business hasn’t yet earned a profit.
Why should you claim business expenses in Canada?
Reducing your tax obligations by deducting qualifying business expenses keeps more money in your business bank account—something that’s important at every stage of your business. That extra money could be reinvested into your business to encourage continued growth, used to benefit your community, or to improve the lives of your employees and family.
Whatever your reasoning, tracking and claiming business expenses makes for wiser financial decisions. In doing so, you’re also continually assessing and supporting your business’s financial stability.
Whether you choose the DIY route with bookkeeping software or decide to work with a bookkeeper or accountant, always remember to accurately record business transactions and save, sort, and file any accompanying documentation or proof.
When tax time comes, you’ll be glad you did (and so will your business bank account).
This article offers general information only, is current as of the date of publication, and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.